Productivity improves in 2Q after 1Q slump

In this Friday, May 16, 2014 photo, a construction worker works on the site of the SoMa at Brickell apartment building in downtown Miami. The Labor Department reports revised figures for productivity in the first quarter on Wednesday, June 4, 2014. (AP Photo/Lynne Sladky) ORG XMIT: NYBZ117(Photo: Lynne Sladky AP)

U.S. workers' productivity rose in the second quarter, regaining momentum after a sharp plunge in the first three months of the year.

Productivity increased 2.5% at a seasonally adjusted annual rate following a 4.5% plunge in the first quarter, the Labor Department said Friday. That was the worst drop in 31 years and reflected the economy's steep 2.1% contraction, which was the most severe since the recession.

Over 12 months since last year's second quarter, productivity has increased 1.2%.

Productivity measures output per hour of work. Higher productivity increases living standards because it enables companies to pay their workers more without having to increase prices, which can boost inflation.

Given the volatility in the productivity numbers, economists prefer to look at them over a longer time frame and some find that trend line dismaying.

"This longer term view shows productivity growth has settled in to less than an impressive pace," averaging 0.7% over the past eight quarters, Moody said in a research note Friday.

Some of that reflects under-investment by businesses in equipment and software that would boost productivity. But more important is that "firms have already wrung most of the productivity gains out of their current work forces," he says.

If the economy starts growing faster, as Moody and many other economists expect, that should lead to a higher rate of hiring. Employers have added an average of 244,000 jobs a month in the last six months, the best six-month pace in eight years.

Historically, however, strong inflation-adjusted gains in wages have come only after an extended period of much faster productivity growth, he said.

"With no such pick-up in productivity growth yet on the horizon, prospects for growth in (inflation-adjusted) labor earnings over the near term are dim," Moody said.

Labor costs rose 0.6% in the second quarter, after jumping 11.8% in the first quarter, the Labor Department said Friday. But labor costs shrank in the second half of last year and in the past 12 months have increased just 1.9%.

"While greater than 2013, this should not be a problematic increase in labor costs for most firms," said Doug Handler, IHS Global Insight's chief U.S. economist.

Although productivity overall rose 2.5% in the second quarter, manufacturing productivity increased at a 3.6% annual rate and 2.1% from 2013's second quarter. That suggests, Handler said, that productivity gains in the service sector lagged overall gains for all nonfarm businesses.

"In the coming months, productivity will be one of the more-watched economic statistics," said Handler in a research note. "Given the recent data, a focus on service sector productivity will be especially important in the coming months."